Calculating Actual Cash Value, Part 26: Montana

Shane Smith | Property Insurance Coverage Law Blog | July 5, 2017

In Montana, a jury may consider all relevant evidence when determining the actual cash value of the property damaged or destroyed.1 Under the broad evidence rule, the trier of fact “may consider any evidence logically tending to the formation of a correct estimate of the value of the insured property at the time of the loss.”2

Where a policy limits the insurer’s liability to the actual cash value at the time of the loss, what constitutes actual cash value depends upon the nature of the property insured, its condition, and other circumstances existing at the time of loss.3

Depreciation because of age should be considered in determining the actual cash value of a building partially destroyed by fire.4

However, although not expressly rejecting the use of depreciation based on the age of a building partially destroyed by fire in arriving at its sound value before the fire, the court in McIntosh v. Hartford Fire Insurance Company,5 did not use a depreciation percentage in further determining the amount of liability of the defendant insurance companies. The record showed that the buildings had been insured under policies which provided “against all direct loss or damage by fire. . .” and also that the company “shall not be liable beyond the actual cash value of the property at the time any loss or damage occurs, and the loss or damage shall be ascertained or estimated according to such actual cash value, with proper deduction for depreciation however caused, and shall in no event exceed what it would then cost the insured to repair or replace the same with material of like kind and quality.” The insurance companies argued that where the buildings had depreciated 48%, the cost of repairing them using new materials should likewise be depreciated by the same percentage in fixing the amount of liability of the companies. The court held that under the state statute, Mont. Code Ann. § 33-24-101, where there was no valuation in the policy, the measure of indemnity in insurance against fire is the expense, at the time that the loss is payable, of replacing the thing lost or injured, in the condition in which it was at the time of injury, and that since no valuation of the property insured was included in any of the policies the statute was incorporated into them. The court reversed and remanded with directions to enter judgment against the insurance companies for an amount equal to the full cost of repairing the building using new materials where necessary to restore it to the condition it was in before the fire.
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1 CQI, Inc. v. Mountain W. Farm Bureau Ins. Co., No. CV 08-134-BLG-CSO, 2010 WL 2943143, at *2 (D. Mont. July 21, 2010).
2 Id.citing Interstate Gourmet Coffee Roasters, Inc. v. Seaco Ins. Co., 59 Mass. App. Ct. 78, 794 N.E.2d 607, 611 (Mass. App. Ct. 2003).
3 Century Corp. v. Phoenix of Hartford, 157 Mont. 16, 482 P.2d 1020 (1971).
4 Lee v. Providence Washington Ins. Co., 82 Mont. 264, 266 P. 640 (1928).
5 McIntosh v Hartford Fire Ins. Co., 106 Mont. 434, 78 P.2d 82 (1938).

Ninth Circuit Holds That Despite ‘Known Damage’ Exclusion Insurer Had Duty Under Oregon Law to Indemnify and Defend Contractor When Property Damage Resulted From Contractor’s Negligent Repair of a Prior Negligent Act

Alex Corey | Constructlaw | June 22, 2017

Alkemade v. Quanta Indem. Co., 2017 U.S. App. LEXIS 6896 (9th Cir. Apr. 20, 2017)

In 1994, Adrianus and Rachelle Alkemade (the “Alkemades”) bought a house from Meltebeke Built Paradise Homes (“Meltebeke”). The home was built on expanding soils, causing significant structural damage.  Meltebeke repaired the existing damage and hired an engineering firm to install a helical pier foundation, which would have prevented any further damage to the home.  However, the helical pier foundation was also installed negligently, afflicting the home with the same type of structural damage as before.

Alkemades sued Meltebeke for negligent supervision of the helical piers installation. Meltebeke entered a settlement agreement with Alkemades in which Meltebeke assigned to Alkemades the right to sue its insurers, Quanta and GFIC, who refused to defend Meltebeke on grounds that its knowledge of the damage caused by the original, defective construction prevented coverage under a known damages provision in Meltebeke’s policies (the “Policies”).  Alkemades subsequently sued the issuers for breach of contract in the U.S. District Court for the District of Oregon for their failure to defend and indemnify Meltebeke.  The insurers moved for summary judgment.

The Policies excluded coverage for damage known by the insured, in whole or in part, that occurred before the policy period began. If such damage was known to the insured, then any “any continuation, change or resumption” of that damage was also deemed known, and excluded.  

The insurers argued that “the helical piers were simply one more in a long line of unsuccessful attempted remedial fixes to the known property damage resulting from expanding soils.” In other words, the property damage sustained after the installation of the helical piers was a “continuation, change, or resumption” of the previously known property damage.  Therefore, the known damages provisions excluded coverage.  The District Court found this interpretation reasonable and granted summary judgment for the insurer’s favor.

On appeal, Alkemades argued that damage caused by Meltebeke’s first negligent act does not “continue, change or resume” when later damage is sustained after a repair that would have fixed the problem absent a second negligent act. The Ninth Circuit evaluated Alkemades’ argument in light of Oregon law, which provides that if the insured offers a competing plausible and reasonable interpretation of the policy, that interpretation governs regardless of whether the insurer offers a different interpretation that is also plausible and reasonable.

The Ninth Circuit reasoned that the Policies’ phrase “continuation, change, or resumption” modified “damage previously known,” a reasonable interpretation is that both the previously known damage and the later damage must share a cause. Because it was possible that the later damage was due to the negligently installed helical pier, and not the original negligent construction, the Court determined that it was plausible to treat the later damage separately.

Does Actual Cash Value Mean Fair Market Value or Replacement Cost minus Depreciation?

Kevin Pollack | Property Insurance Coverage Law Blog | June 4, 2017

What is an insured, who has an “actual cash value” property insurance policy, entitled to recover when their property is damaged, but not a total loss? Is the insured entitled to the cost to repair/replace the property minus depreciation? Or is the insured’s recovery limited to the property’s fair market value? What if the property’s fair market value of the property at the time of the loss is far less than the amount of money it will take to repair the property minus depreciation?

The California Court of Appeal, recently dealt with these issues in California Fair Plan Association v. Garnes.1 In Garnes, the insured’s home was damaged by a kitchen fire. At the time of the loss, the property was insured by California Fair Plan on an actual cash value basis, had a policy limit of $425,000, and had a fair market value of only $75,000.

The California Fair Plan insurance policy contained a paragraph entitled “Loss Settlement,” which stated that Fair Plan would pay the following amounts for losses to the insured’s dwelling:

(1) Total Loss: If the greater of the cost either to reconstruct or replace the damaged part of the property exceeds the actual cash value before the loss of all covered property …, we will pay such actual cash value.

(2) Partial Loss: In the cases of losses that are not described in (1) above, we will pay the least of the following amounts: [¶] (a) The lower of the cost either to reconstruct or replace the damaged part of the property, less a reasonable amount for depreciation; or [¶] (b) The actual cash value before the loss of the damaged property.

The policy defined “actual cash value” of property to mean “its fair market value.”

The insured argued that she should be able to recover the amount it would cost to repair the house, less an amount for depreciation, the net amount of which was agreed to be $320,549. California Fair Plan disagreed and argued that the insurance policy and the California Insurance Code allowed it to pay the lesser of that amount or the fair market value of the house, which at the time of the fire was $75,000. California Fair Plan argued the loss was a “total loss” because the cost to repair the property exceeded its fair market value. The insured, however wished to rebuild the property because it had not been destroyed and based on its sentimental value to her family.

The trial court agreed with California Fair Plan and granted its summary judgment motion, finding California Fair Plan needed to only pay $75,000—the fair market value of the property at the time of the loss.

The insured appealed.

The court of appeal first examined Insurance Code section 2051:

Section 2051 sets forth the “measure of indemnity in fire insurance” for an open ACV policy…. In the case of a “total loss to the structure,” recovery is limited to the lesser of the policy limit or a property’s “fair market value.” (§ 2051, subd. (b)(1).) In the case of “partial loss to the structure,” however, recovery is not limited to fair market value; instead, it is the lesser of the policy limit or “the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its conditions at the time of the injury.” (§ 2051, subd. (b)(1).) Under subdivision (b)(2), it is clear that in the case of “partial loss to the structure,” the insured is entitled to repair, rebuild or replace that which was lost or injured. While such recovery is reduced by a deduction for physical depreciation and may not exceed the policy limit, nothing in subdivision (b)(2) or the remainder of section 2051 indicates that the policyholder is limited to the fair market value of the property or any part of it.

(Emphasis added.)

Based on the language of the statute and the fact that the insured’s property was not totally destroyed, the appellate court concluded that the insured’s claim was for a “partial loss to the structure” (not a total loss) and that, under Insurance Code section 2051, she was therefore entitled to recover the amount it would cost her to repair, rebuild, or replace the damaged property less a fair and reasonable deduction for physical depreciation based upon its conditions at the time of the injury.

California Fair Plan then argued, that despite the Insurance Code’s language, its policy, not the insurance code, controlled the outcome, and because its policy defined actual cash value as fair market value, and because its policy gives the insurer the option to pay the lesser of the amount to repair the property minus depreciation or the fair market value, it was only required to pay the insured $75,000.

The court disagreed, and held that where an insurance policy’s terms violate the insurance code, the insurance code controls. Its rationale on this issue was:

The parties also dispute whether the Policy is to be applied in accordance with its terms or instead in accordance with the Insurance Code. FAIR argues that regardless of whether the Policy complies with the governing Insurance Code provisions, this case and its obligations to Garnes are “governed by the policy she purchased, not by some statutory form policy she never purchased.” Garnes relies on Century–National Ins. Co. v. Garcia (2011) 51 Cal.4th 564, 120 Cal.Rptr.3d 541, 246 P.3d 621 (Century–National) for the proposition that “a fire insurance policy that offers less coverage than the standard form (Insurance Code § 2071) is invalid,” and “that insurers may not provide less coverage than appears in the form fire policy set forth in § 2071.”

[W]here California’s statutory or decisional law require coverage, an insurer may not circumvent the law by employing contrary contract terms…[W]here an insurer’s policy contains terms that conflict with the law, the courts will decline to enforce the impermissible terms and read into the policy the terms required by statute.

The court ruled that “since mandatory insurance coverage provisions are incorporated into every policy to which they pertain, section 2051 is incorporated into the standard form policy set forth in section 2071, as indicated by case law, regulation and statute.”

Consequently, the court determined that California Fair Plan’s provisions seeking to limit an insured’s recovery for a partial loss to a structure to the property’s fair market value was unenforceable because such provisions were in direct conflict with Insurance Code section 2051.
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1 California Fair Plan Ass’n v. Garnes, No. A143190, 2017 WL 2303165 (Cal. Ct. App. May 26, 2017).

The Interplay Between Property Damage Caused by an Explosion and Coverage

Stephanie Poll | Property Insurance Coverage Law Blog | June 9, 2017

Insurance provisions related to explosions, like all other terms, are subject to the rules of construction applied to all insurance contracts. Typically, property damage caused by explosions is covered under the policy. However, some policies may expressly define the term “explosion” to exclude events that would generally be defined as such.1 For instance, policies may exclude and thus not cover any of these instances that would seem to constitute an explosion: shock waves caused by aircraft (“sonic boom”), electric arcing, rupture, or bursting of rotating or moving parts of machinery caused by centrifugal force or mechanical breakdown, water hammers, rupture or bursting of water pipes, rupture or bursting due to expansion or swelling of the contents of any building or structure caused by or resulting from water, or rupture, bursting or operation of pressure relief devices.2

All adjusters know that with property damage—in particular with explosions—if there are no eyewitnesses to corroborate events, you can only analyze the physical evidence available after the incident. This is why the duty to analyze and preserve evidence immediately is so crucial. Once it’s determined that an explosion occurred, then the next step is determining what aspects of the damage will be covered under the policy.

Where an explosion occurs during and after the commencement of a fire, courts have often held that the fire is the direct and proximate cause of the loss, thus providing coverage.3 This is even the case where the policy contains an exception against losses from explosions as well as in those where the policy does not contain such a provision. Similarly, where damage is caused by a explosion of gases that accidentally came in contact with the flame of a lighted gas jet, it has been covered as damage by fire.4

One interesting case, Mork v. Eureka-Security Fire and Marine Insurance Company, dealt with an explosion and subsequent damage to a heating and plumbing system.5 The insured had a fire policy with an endorsement with the following language: “the coverage of this policy is extended to include direct loss or damage by *** explosion.” The damage was caused by the freezing of water in the plumbing and heating system, due to the failure of the oil burning furnace to function in sub-zero weather because of an explosion in the combustion chamber. The court looked at a number of cases, including Norwich Fire Insurance Society, Ltd. v. Board of Commissioners, where an explosion and ensuing fire in a grain elevator disabled drying machinery, resulting in the deterioration of corn.6 In Mork, the court ruled in the explosion was a direct loss and damage by explosion within the extended coverage endorsement, stating, “The freezing in the instant case was not remote to the occurrence of the explosion, but an immediate and direct result. To say that subzero weather in Minnesota in midwinter is something that the parties did not contract with reference to is to ignore realities.”7

In Goodyear Rubber and Supply, Inc. v. Great American Insurance Company, the court determined the obligations of insurers to provide coverage for insured’s liability for an explosion and fire that set a salvage operation in motion.8 There, Goodyear purchased two insurance policies from Great American, a “Select Liability Policy” and a “Catastrophic” or “Umbrella” policy. While a barge owned by Pacific Inland Navigation Company was discharging gasoline, a hose assembly sold by Goodyear leaked, causing an explosion and fire. The tug Chinook, owned by Shaver Transportation Company, removed the barge to safety and helped put out the fire. The question posed was whether Goodyear’s policy covered the salvage claim. The court held the salvage was a covered loss, noting “the damage caused by the occurrence of explosion and fire, set the salvage operation in motion…it would be a strange kind of justice, and a stranger kind of logic, that would hold the defendant to be liable for as much as $450,000 if the barge and its contents had been consumed by fire, but free of liability for a much lesser amount because of the fortuity of the rescue.”9

Taking case law into consideration, it is important to always closely review the sections of your insurance policy that deal with explosions, fire, and subsequent damage; pay attention to what’s excluded and the language used in the policy.
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1 Couch on Insurance Third Edition Risks and Activities Covered by Insurance Policy §§ 150:6 Explosion, generally; 21:1 et. seq., 22.1 et. seq.
2 Couch on Insurance § 150.6.
3 Rossini v. Security Mut. Fire Ins. Co. Of Chatfield, Minn., 46 Cal.App.675 (2d Dist. 1920).
4 Scully v Bremer County Farmers’ Mut. Fire Ins. Ass’n., 215 Iowa 368 (1932).
5 Mork v. Eureka-Security Fire and Marine Ins. Co., 230 Minn. 382 (1950).
6 Norwich Fire Ins. Society, Ltd. v. Board of Com’rs, 141 F.2d 600 (5 Cir. 1944).
7 Mork, 230 Minn. 382, 389.
8 Goodyear Rubber and Supply, Inc. v. Great American Ins. Co., 545 F.2d 95 (9th. Cir. 1976).
9 Id. at 96.

Prior Knowledge of Risk of Property Damage Not Enough to Preclude Coverage by Known Loss Provision

Katie M. Sluss | Cozen O’Connor | May 31, 2017

Last month, the Ninth Circuit Court of Appeals, in an unpublished decision of first impression under Oregon law, held that damage sustained after a negligent repair is not a continuation, change, or resumption of known property damage. Alkemade v. Quanta Indemnity Co., No. 14-35605, 2017 WL 1404708 (9th Cir. April 20, 2017). As a result, the policy’s known loss provision did not preclude coverage.

Meltebeke Build Paradise Homes, Inc. (Meltebeke) sold Rachelle and Adrianus Alkemade a new house with an inadequate crushed rock foundation that sat upon expansive soils. After the house suffered extensive structural damage, Meltebeke repaired the existing damage and hired an engineering firm to install a helical pier foundation. However, the helical piers were installed incorrectly, and the Alkemades’ house suffered the same type of structural damage as before. The parties did not dispute that had the helical piers been installed correctly, the piers would have prevented any future damage.

The Alkemades sued Meltebeke for negligent supervision of the helical pier installation. Two of Meltebeke’s insurers, General Fidelity Insurance Company (GFIC) and Quanta Indemnity Insurance Company (Quanta), refused to defend Meltebeke on the basis that Meltebeke’s knowledge of the damage caused by the original, defective construction prevented coverage under the known loss provision in the policies. Following a settlement, Meltebeke assigned its rights to the Alkemades, and the Alkemades sued GFIC and Quanta for their failure to defend or indemnify.

GFIC and Quanta moved for summary judgment based, in part, on the known loss provision. The district court granted the motion. The court found that Meltebeke knew of a risk of property damage from the expanding soils prior to the policy periods and that the property damage was the same type of structural damage from the same danger of which Meltebeke knew, and had attempted unsuccessfully to address. The district court thus held that Meltebeke knew of the property damage prior to the policy period.

The Ninth Circuit agreed with this interpretation of the known loss provision but noted that the Alkemades’ alternative interpretation was also reasonable. Under Oregon law, if an insured offers a competing plausible and reasonable interpretation of the insurance policy, the insured’s interpretation governs despite an insurer offering a different interpretation that is also plausible and reasonable. The Alkemades contended “that the damage sustained after a repair that would have fixed the problem absent new negligence is not a ‘continuation, change or resumption’ of previously known damage.” Id. at *2.

In determining that the Alkemades’ interpretation of the known loss provision was plausible, the Ninth Circuit noted the plausibility bar is low. The court stated that the term “continuation, change or resumption” in the known loss provision is used to modify damage previously known, which implies that the damage previously known and the damage later suffered share a cause. Due to this casual relatedness, the court noted that it is “plausible to conclude that damage sustained after a repair that would have fixed the problem absent new negligence is not a ‘continuation, change or resumption’ of previously known damage.” Id. As a result, the court held that the Alkemades’ interpretation satisfied the plausibility requirement.

The court next determined that the Alkemades’ interpretation of the known loss provision was reasonable based on the same reasons the interpretation was plausible, as well as three additional grounds. First, the court noted that the “Alkemades’ interpretation [was] reasonable because it require[d] a causal relatedness between the previously known damage and the damage at issue.” Id. Second, the court noted that were it to adopt GFIC’s or Quanta’s interpretation, the court would be adding a new exclusion — damage caused by known risks. The Alkemades’ interpretation, in contrast, did not require reading new terms into the policy. Third, the court noted that under the Alkemades’ interpretation, a repair contractor’s knowledge of the conditions that led to the need for a failed repair would not preclude the insurance coverage the contractor is required to carry.

As a result of finding the Alkemades’ interpretation of the known loss provision plausible and reasonable, the court held that GFIC and Quanta had a duty to defend. The court remanded the case for further proceedings with respect to the duty to indemnify because of disputed facts.

The case illustrates the need to evaluate whether prior knowledge was of a risk or was of actual property damage before deciding whether the known loss provision precludes coverage.